Rising inflation to increase grumbling about ECB stimulus

Economist Carsten Brzeski at ING-DiBa said that “with inflation about the magical 2 per cent level, new complaints against the ECB’s loose monetary policy and new media headlines are likely to emerge.”

The figures may increase the public relations headache for ECB President Mario Draghi but are not likely to make the bank change course.

Draghi has argued that the recent increase in inflation comes from global oil prices, an external factor that is not due to a fundamental improvement in the economy. He has also said that the economy still needs support through a year of heightened political uncertainties that will include elections in the Netherlands, France, and Germany.

Analyst Michael Schubert at Commerzbank said that while some ECB council members want the bank to start thinking about ending its extraordinary stimulus efforts, “our analysis indicates that opponents of an early exit have a solid majority” on the bank’s 25-member governing council.

A frequent stimulus critic, governing council member Jens Weidmann, did not make an explicit call for the bank to signal it is ready to exit the stimulus program. But he underlined Wednesday what he considers the unwanted side effects of the ECB’s efforts.

In the text of a speech delivered in Ljubljana, Slovenia, he argued that current low borrowing rates offer “few incentives for governments to consolidate their budgets” since debt does not incur high interest costs.

Weidmann sits on the ECB’s council by virtue of his post as head of Germany’s national central bank. He has been critical of the ECB’s decision to use newly printed money to purchase government bonds and corporate bonds, driving interest yields down.

The governing council is made up of a six-member executive board headed by Draghi, and by the heads of the 19 national central banks. Many of them are from member countries that need stimulus more than Germany, where unemployment is only 3.9 per cent.

In December, the ECB decided to continue bond purchases through the end of this year while reducing them from 80 billion euros ($84 billion) a month to 60 billion euros a month from April. The stimulus is aimed at raising inflation and supporting the economy.

Most analysts think the bank will not back off its stimulus but may signal at some point this year its intentions to start tapering it off gradually in 2018.

Bank officials point out that the current increase in inflation is largely the result of comparisons with a period of very low oil prices last year. Core inflation, which leaves out fuel prices, remained stuck at 0.9 per cent in January.

David McHugh, The Associated Press

by Canadian Press

Rising inflation to increase grumbling about ECB stimulus

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